EDITORIAL: Weakening yen poses challenges

Japan is not as big an export rival for Taiwan as South Korea is, so supposedly the yen’s weakness will pose less of a threat to Taiwanese exporters’ profits and Taiwan’s economy than some have feared.

That is correct to some extent. Taiwanese memorychip maker Macronix International Co, which counts Japanese video game console maker Nintendo as its top client, said on Friday that a weaker yen had eroded its revenue by about NT$100 million (US$3.39 million) in the first quarter of the year. That erosion looked minimal because it represented only about 2 percent of the company’s total revenue of NT$4.4 billion last quarter.

Macronix is one of only a small number of Taiwanese firms that were hurt by the devaluation of the yen. Meanwhile, other companies, such as LCD panel maker Innolux Corp, expect to benefit from the yen’s decline because they will pay less to import raw materials or manufacturing equipment. About 20 percent of Innolux’s raw materials came from Japanese suppliers, the company said.

However, looking at this issue from a broader view, Japan’s unlimited quantitative easing monetary policy, which has caused a significant devaluation of its currency, will have a deeper impact on other Asian economies, particularly Taiwan, because Taiwan’s economy is relatively small and vulnerable to volatility.

The problem will worsen over time as massive overseas funds will flow into Asian and Taiwanese money markets, seeking opportunities to make profits from the currency carry trade amid the rising risk of a competitive depreciation war among Asian currencies.

Since the beginning of the year, the yen has depreciated the most among Asian currencies, falling by 11.65 percent against the US dollar. The South Korean won devalued by 2.99 percent, while the New Taiwan dollar weakened 1.36 percent.

Central bank Governor Perng Fai-nan (彭淮南) on Saturday warned about the consequences of the quantitative easing adopted by some of the world’s largest economies. He said during the annual Asian Development Bank’s meeting that governments’ policy of printing more money to support their economies “will not eradicate the root of the problem.”

Instead, he said it has created massive liquidity and “a global liquidity glut will only build up further and put the already fragile global economy at risk.”

The aggregate daily turnover of foreign exchange markets around the world amounted to US$4 trillion in 2010, Perng said, citing statistics from the Bank for International Settlements.

Emerging economies in Asia tend to bear the brunt, as those countries have to deal with the large and volatile international capital flow and accompanying wild swings in exchange rates, Perng said.

Taiwan again registered US$1.19 billion in net foreign capital inflows last month, bringing the overall foreign capital inflows to US$3.62 billion this year, according to statistics released by the Financial Supervisory Commission on Friday.

The inflows are building up the New Taiwan dollar against the US dollar, making central bank officials wary, as they hope to keep the NT dollar moving within a narrow range to support the nation’s wobbling exports growth and keep inflation in check.

On Friday, the NT dollar rose by NT$0.026 and ended at NT$29.61 against the US dollar, while the local currency gained NT$1 during the earlier trading session, showing the clout of the central bank.